Subprime mortgages are widely blamed for the financial crisis that devastated markets in 2008 and 2009. Problems developed when borrowers were given high-priced loans even though their credit history was questionable. Because the borrowers had little, if any, equity in the homes, even small drops in home values increased the likelihood of foreclosure.
Five years later, it seems that history is no longer important and the Federal Housing Administration (FHA) is moving back into the subprime market. FHA loans require small down payments and borrowers have little equity in the property.
Another characteristic of the subprime market was high fees. FHA has been steadily increasing fees over the past few years and now charges an up-front fee of 1.75 percent and annual fees of 1.35 percent. The up-front fee can be completely financed and repaid over 30 years, assuming the borrower is willing to pay interest on the amount of the up-front fee plus the annual fee on the balance due.
For borrowers, it can be difficult to understand the true cost of a loan when monthly payments include percentage-based fees in addition to interest.
Credit history is once again no longer a problem for some potential borrowers. While a foreclosure has traditionally led to problems in getting new mortgage loans, the FHA recently made a change to policy that ignores some foreclosures. If the mortgage applicant lost a home due to an economic setback beyond their control, like a layoff, borrowers can receive new loans just a year after foreclosure.
The government has been able to recreate the credit conditions that led to the worst market crisis since the Great Depression in only five years.
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